What’s Fueling M&A Fever?April 2007 By Bob Cronin
Today’s Numerous Options
Increasing M&A activity has, to some extent, produced aggressive, well-financed owners with multiple printing operations. These people have a vision for the business and believe that bigger is better. They have strong cash positions and can readily invest in equipment, facilities and acquisitions to achieve their goals. They are focused on attaining a target rate of return on investment no matter what.
Such thinking has negative consequences, thus it is acutely important to consider what type of exit/succession makes sense for you. Your options include:
Majors (Acquisition/Rollup)—In an acquisition by one of the majors, your return depends largely on your ability to deliver non-redundant products, services, customers or solutions that correlate with their overall strategy. Hence, your impact on the company’s growth and competitive positioning will be key in determining your selling price.
Large, public companies tend to have large revenue bases, often upwards of $10 billion. An acquisition that provides 10 percent organic growth would need to deliver around $1 billion in new annual sales, limiting the transaction to a complex, multiple-acquisition deal.
Plus, any transaction with the majors must be accretive; it’s not just about adding to the revenue base, it’s about delivering new opportunity. And you must be willing to relinquish control. Before considering this option, look at the company’s trading price, and understand it will pay you at a multiple less than its own.
Strategics—A strategic acquirer is any print-related entity that views your enterprise as a boon for business. It could be a competitor or an alliance, friend or foe. It could be considering you from the vantage point of how your products/services expand its position, or the value it gets from taking you off the street.
A strategic buyer typically identifies your company based on an insight into your business—and will take over its management and direction. They may know you’re looking to retire, recently lost a vital account or manager, or other fact that underscores the need for purchase.
The word strategic implies that some advantage is gained from joining properties, businesses and markets. Reality says it’s strategic only if it works.
Private Equity—As noted, private equity firms are investors seeking profitable venues for their stakeholders. They invest in multiple industries, typically targeting a 25-plus percent annual rate of return.
The printing industry offers private equity firms multiple acquisition opportunities; strong market segments with outstanding growth potential, multiple models by which to make a return; and potential for geographic or national platforms.
Private equity firms invest by paying a portion of the buy price using capital from a “fund,” then borrowing the balance at a competitive rate. The return comes from growing your business quickly, paying down the remaining debt and getting a higher multiple at exit.
Certainly, the best potential lies with firms experienced in our industry. They already believe in your company and can support you with strategic direction and accessibility to resources—as well as necessary capital. Large private equity firms buy at a higher multiple if your cash flow is consistent, among other considerations.
Employee Stock Ownership Plan (ESOP)—Under an ESOP, fundamentally, you give your employees shares of the company based on what they helped you earn. If you are seeking retirement, a financial institution can help employees buy out the company using current cash flow. Although an ESOP offers a relatively easy and expeditious exit/ownership transfer, it does nothing to ensure the future of your hard-earned business.
Getting Optimum Value
The current M&A market is the best it has been for the last 10 years. Majors, strategics and private equity players are vigorously pursuing new opportunities, and are paying top dollar. If you are seeking an exit, planning a succession, or even looking for a new growth channel, now is the time to get in.
There are several steps to ensure your maximum draw—today and for the future. Our experience in M&A has shown that companies that secure the best value have:
• A unique niche, vertical market, product, or service.
• An intelligent product/service mix that capitalizes on market dynamics.
• A proven management team with a clear vision and the ability to execute.
• A strong, strategic business plan with compelling competitive advantages.
• Non-concentrated account base (no greater than 20 percent sales with any single customer) and established contracts.
• No immediate need for large capital outlay (offers will be reduced to accommodate).
• Non-union employees (union presence, contract length may impact final price).
• Sales channels (direct sales force is more valuable than trade).
Like every industry, print is cyclical, and there is no guarantee that investment interest will continue. The industry’s ability to succeed is the leading indicator for continued favorable transactions. The second consideration is the cost of capital. If interest rates stay attractive, print deals will continue—from every buyer pool.
In the end, nobody understands your business, goals, people and opportunities as well as you do. The direction you choose depends on what you envision for the future. You’ve worked hard to build your company and have a lot at stake. Consider your options carefully. Hire a consultant for expert guidance. And take advantage of today’s most lucrative opportunity in print. PI
About the Author
Bob Cronin is managing partner of The Open Approach, a boutique consultancy and M&A specialist dedicated to printing. The firm has spearheaded some of the industry’s most lucrative ventures for companies of every size and marketplace, and has been named PIA/GATF’s exclusive M&A recommended partner. Cronin, former chairman and CEO of Wallace Computer Services, can be reached at (630) 323-9700 or at www.theopenapproach.net.